Why analysts got fired for talking to journalists

Journalists are up in arms about the latest fine to hit Citigroup. In general, journalists tend to like it when banks get bashed for violating rules, but in this case the bashing hits home: Citi was fined $2 million, and two analysts were fired, because those analysts talked to the press — actually, emailed reporters — and got caught doing so. And reporters, of course, hate anything which makes it harder for them to talk to sources.

But there is something admirable about this fine: it’s a very rare case of Citi being dinged for violating its promises.

Reading the official consent order, it becomes clear that Massachusetts, here, is doing something which ought to be done far more often. Whenever a bank enters into a settlement, it makes an empty promise to behave itself in future. And with this case we finally see a regulator taking Citi to task for breaking one of those promises.

The actual violations, here, are pretty minor: they involve analysts talking to the press via Citi’s corporate email system. Oops. In doing so, those analysts were violating internal Citi disclosure policies — and Citi, in a 2003 consent agreement, had promised to get serious when it came to those policies. So Massachusetts found itself in possession of a rare smoking gun, and took full advantage of it. Other banks should be worried too: the state says that it’s investigating “all of them, Morgan Stanley, Goldman Sachs, JPMorgan” on similar grounds.

This is not, then, an attack on analysts talking to journalists: it’s an attack on banks breaking their promises, and not really caring what they agree to do in legal settlements.

But the settlement does make it very clear how silly SEC disclosure rules are. As I said in May, sell-side research isn’t inside information, even as settlements like this make it seem like it ought to be treated as incredibly confidential.

When analysts talk to journalists — especially very plugged-in journalists at places like TechCrunch — it’s basically a way for both sides to bounce ideas off each other. There’s nothing nefarious going on. But the SEC doesn’t like the idea of sell-side analysts bouncing ideas off people, especially if those ideas involve things like forecasts or upgrades or downgrades. The regulatory architecture here is based on the fiction that analysts come up with all of their ideas in a vacuum, and then write those ideas down in the form of a research note. Only once the research note is public can the analysts talk about its contents to anybody else — and even then they can only really parrot what’s in the note.

The real world, of course, doesn’t work like that. Wall Street ideas, like all other ideas, thrive on conversations and iterations between a large group of people: investor-relations types, analysts, investors, journalists, bloggers, you name it. I would love to see a world where such conversations took place largely in the open, rather than a world where the sell-side is constantly being harried by compliance people, and being told they can’t talk to anybody.

On the other hand, if a bank makes a series of promises in a series of settlements, it behooves regulators to get serious about holding the bank to those promises. Banks make far too many promises they don’t intend to keep. So even while today’s fine is likely to have a chilling effect on information flow in the markets, the silver lining here is that it might also provide an incentive for banks to take their promises seriously.